Unclear Regulations and Opportunistic Behavior: Capital Gains from Vietnamese Assets
The ConocoPhillips and Perenco v. Viet Nam proceedings raises questions surrounding the lack of clarity in Vietnamese tax law.
by Connor Steelberg, staff member
In 2012, ConocoPhillips (U.K.) Ltd., a subsidiary of the eponymous American oil and gas giant, sold its Vietnamese business unit—a collection of subsidiaries with significant stakes in multiple oilfields and an oil pipeline, all located off the coast of southern Vietnam—to Perenco for $1.3 billion.[1] In disposing of its Vietnamese assets, ConocoPhillips generated a profit of almost $900 million, on which it paid no tax.[2]
The sale transferred ownership of ConocoPhillips (U.K.) Gama Limited and ConocoPhillips (U.K.) Cuu Long Limited—both British entities—to a U.K. company owned by Perenco.[3] The only assets held by the two subsidiaries were ConocoPhillips’ oil interests in Vietnam.[4] Under the U.K.’s “substantial shareholding exemption,” profits generated by the sale of shares in subsidiaries are not subject to capital gains tax by the British government.[5]
The UK-Vietnam double taxation treaty (“DTT”) permits the Vietnamese government to impose taxes on any capital gains from the sale of shares by British companies, the value of which is derived from immovable property in Vietnam.[6] The total owed to Vietnam in such a transaction would near $180 million. While Vietnam does not have a specific tax regime for capital gains, the transfer of shares would be subject to the corporate income tax of 20% of any profit arising from such transfer.[7] Both transferor and the transferee could be held liable for the tax payments, as well as for: (1) a late payment penalty of 0.03% on the outstanding tax liability, accrued daily for every day the amount remains outstanding; (2) 20% on underreported amounts; and (3) larger penalties—up to 300%—for outright evasion.[8]
Following the government’s declaration that it intended to tax the transaction, ConocoPhillips and Perenco filed a case with the United Nations Commission on International Trade Law (UNCITRAL) court of arbitration, under the terms of the UK-Vietnam bilateral investment treaty.[9] The petroleum companies argue that the capital gains in question resulted from sale of shares of UK subsidiaries, not from ConocoPhillips’ interests in Vietnamese oil fields.[10] In effect, the transaction occurred off-shore, between companies with no taxable presence in Vietnam. The Vietnamese government, meanwhile, stresses that the underlying value of the transaction was the Vietnamese assets involved, and as such the transfer is subject to Vietnamese tax law.[11]
The point of view presented by ConocoPhillips and Perenco seems formalistic to the extreme. It is clear that the transferred assets—the two British subsidiaries—were offshore in name only, as their value was located solely within Vietnam. Having paid no taxes on the capital gains to the British government, ConocoPhillips would not be able to avail itself of any credit arising out of British taxes, per the U.K.-Vietnam DTT.[12]
The Vietnamese government’s argument, however, is not fully persuasive either. In June of 2012, Vietnam’s General Department of Taxation (“GDT”) issued Official Letter No. 2268/TCT-CS which unambiguously states that the indirect transfer of an offshore holding company’s shares is not subject to tax by the Vietnamese state, so long as:
(i) The transferor is not permanently established in Vietnam;
(ii) The transaction occurs outside of Vietnam;
(iii) The target holding company’s equity in the Vietnamese subsidiary remains unchanged;
(iv) Neither the offshore target nor its onshore subsidiary receives any income from the transaction; and
(v) The Vietnamese subsidiary’s investment license remains unchanged (a change in name of the Vietnamese subsidiary may require a new license).[13]
These five requirements appear to have been met in the case of the ConocoPhillips-Perenco transaction.
Following certain modifications in Vietnamese tax law under Decree 12/2015/ND-CP (effective as of 1 January 2015), the GTD has begun to indicate in its more recent guidance that offshore acquisitions may in actuality be subject to the Vietnamese corporate income tax.[14] However, there has not been any specific guidance on how this is actually to be implemented. There has been little clarity as to how taxes for capital gains would be filed—in practice, there is no voluntary declaration of capital gains on the indirect transfer of shares.[15] Problematically, the government has not explained how the profits would be calculated for tax purposes or what documentation would be required to substantiate the determination of capital gains.[16] Further, it is not clear whether such ex-post changes to the tax regime would benefit the Vietnamese government in a case arising out of a 2012 sale.
The ConocoPhillips and Perenco v. Viet Nam proceedings raises questions surrounding the lack of clarity in Vietnamese tax law. In the shadows of such legally grey areas, government officials may selectively subject corporate acquisitions to taxes. This would provide them with substantial leverage over investors—foreign and domestic—and allow such officials to extract rents by selling their leniency.
Further, the case sheds light on the offshore-structured transactions multinational corporations employ to minimize taxes in jurisdictions with lucrative assets and weak institutions. Governments in the developing world are often in dire need of revenue to fund important infrastructural projects that can help lift their citizens out of poverty and such measures have significant fiscal impacts on low- and middle-income states. Non-payment of taxes is particularly egregious when—as in this instance—it involves foreign companies exploiting the country’s most valuable natural resources. Beyond the revenues lost through unpaid taxes, by bringing arbitration proceedings against Vietnam, ConocoPhillips and Perenco are forcing the government to incur serious legal expenses, further limiting the state’s already strained financial capacity.
Despite this, Vietnam is poised to bring into force the European Union-Vietnam Investment Protection Agreement (“EVIPA”), which provides E.U. companies the option to settle disputes with the Vietnamese government through arbitration outside of the country.[17] This may very well offer more multinational corporations the opportunity to file cases against the Vietnamese state in the event the latter seeks to tax offshore gains from the corporations’ onshore assets.
[1] ConocoPhillips (U.K.) Limited, Annual report and financial statements for the year ended 31 December 2012, page 2, https://beta.companieshouse.gov.uk/company/00524868/filing-history?page=3.
[2] Id.
[3] https://www.theguardian.com/global-development/2018/aug/15/oil-firms-use-secretive-court-hearing-in-bid-to-stop-vietnam-taxing-their-profits
[4] Id.
[5] https://www.gov.uk/government/publications/reform-of-substantial-shareholding-exemption-for-qualifying-institutional-investors/reform-of-substantial-shareholding-exemption-for-qualifying-institutional-investors
[6] UK/VIETNAM DOUBLE TAXATION AGREEMENT, Article 13. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/507435/1994-vietnam_-_in_force.pdf
[7] https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-vietnamhighlights-2019.pdf
[8] Id.
[9] https://www.financeuncovered.org/tax-havens/analysis-how-rich-oil-firms-are-using-secretive-court-to-fight-capital-gains-tax-in-developing-world/
[10] Id.
[11] Id.
[12] UK/VIETNAM DOUBLE TAXATION AGREEMENT, Article 22. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/507435/1994-vietnam_-_in_force.pdf
[13] https://blogs.duanemorris.com/vietnam/2016/06/07/lawyer-in-vietnam-oliver-massmann-transfer-pricing-in-mergers-and-acquisitions/
[14] https://www.ey.com/Publication/vwLUAssets/ey-tax-update-august-2018-en/$FILE/ey-tax-update-august-2018-en.pdf
[15] https://blogs.duanemorris.com/vietnam/2016/06/07/lawyer-in-vietnam-oliver-massmann-transfer-pricing-in-mergers-and-acquisitions/
[16] Id.
[17] https://ec.europa.eu/trade/policy/in-focus/eu-vietnam-agreement/
Connor Steelberg a second-year student at Columbia Law School and a Staff member of the Columbia Journal of Transnational Law. Connor graduated from Northwestern University in 2016 with a B.A. in Political Science.